Wize AP Macroeconomics Textbook > Measuring a Nation's Income

Circular Flow Diagram

Popular Courses

ECON 203

Concordia University

ECON 201

University of Calgary

AP Macroeconomics Exam Prep Course

AP Exam Prep

Find My Course

0:00 / 0:00

Circular Flow Diagram

The circular flow diagram shows us the flow of money and services between households and businesses.

Households - these are consumers that buy output from firms. They also provide labor for the firms which is why they are called factors of production in the factor market. 

Businesses - these are firms that produce output for households to buy in the goods market. They also buy/hire factors of production (like labor and machines) in the factor market.

Practice: Circular Flow Diagram Practice Question
The circular flow diagram shows that:

A) Firms hire the factors from households and produce the output consumed by households.

B) Households provide the factors to firms and buy the output produced by firms.

C) The source of household income is the producing sector and the source of firms' revenue is household spending.

D) All of the above are correct.

I don't know